ESS-6.30.15-10Q
                                            

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2015

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________to _________

Commission file number 001-13106

ESSEX PROPERTY TRUST, INC.
ESSEX PORTFOLIO, L.P.
(Exact name of Registrant as Specified in its Charter)
Maryland (Essex Property Trust, Inc.)
California (Essex Portfolio, L.P.)
 
77-0369576 (Essex Property Trust, Inc.)
77-0369575 (Essex Portfolio, L.P.)
 
 
 
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification Number)
925 East Meadow Drive
Palo Alto, California    94303
(Address of Principal Executive Offices including Zip Code)

(650) 494-3700
(Registrant's Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days.
Essex Property Trust, Inc.    Yes x   No o
Essex Portfolio, L.P.     Yes x   No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Essex Property Trust, Inc.    Yes x   No o
Essex Portfolio, L.P.     Yes x   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” ”accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Essex Property Trust, Inc.:
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o   (Do not check if a smaller reporting company)
Smaller reporting company o

Essex Portfolio, L.P.:
Large accelerated filer o
Accelerated filer o
Non-accelerated filer x   (Do not check if a smaller reporting company)
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Essex Property Trust, Inc.    Yes o   No x
Essex Portfolio, L.P.     Yes o   No x
 
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 65,744,325 shares of Common Stock ($0.0001 par value) of Essex Property Trust, Inc. were outstanding as of August 3, 2015.
 


ii

EXPLANATORY NOTE

This report combines the reports on Form 10-Q for the three and six month periods ended June 30, 2015 of Essex Property Trust, Inc. and Essex Portfolio, L.P. Unless stated otherwise or the context otherwise requires, references to “Essex” mean Essex Property Trust, Inc., a Maryland corporation that operates as a self-administered and self-managed real estate investment trust (“REIT”), and references to “EPLP” mean Essex Portfolio, L.P. (the “Operating Partnership”). References to the “Company,” “we,” “us” or “our” mean collectively Essex, EPLP and those entities/subsidiaries owned or controlled by Essex and/or EPLP.  References to the “Operating Partnership” mean collectively EPLP and those entities/subsidiaries owned or controlled by EPLP.

Essex is the general partner of EPLP and as the sole general partner of EPLP, Essex has exclusive control of EPLP's day-to-day management.

The Company is structured as an umbrella partnership REIT (“UPREIT”) and Essex contributes all net proceeds from its various equity offerings to the Operating Partnership. In return for those contributions, Essex receives a number of OP Units (see definition below) in the Operating Partnership equal to the number of shares of common stock it has issued in the equity offering.  Contributions of properties to the Company can be structured as tax-deferred transactions through the issuance of OP Units in the Operating Partnership, which is one of the reasons why the Company is structured in the manner outlined above. Based on the terms of EPLP's partnership agreement, OP Units can be exchanged with Essex common stock on a one-for-one basis. The Company maintains a one-for-one relationship between the OP Units of the Operating Partnership issued to Essex and shares of common stock.

The Company believes that combining the reports on Form 10-Q of Essex and EPLP into this single report provides the following benefits:

•
enhances investors' understanding of the Company and the Operating Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;
•
eliminates duplicative disclosure and provides a more streamlined and readable presentation since a substantial portion of the disclosure applies to both the Company and the Operating Partnership; and
•
creates time and cost efficiencies through the preparation of one combined report instead of two separate reports

Management operates the Company and the Operating Partnership as one business. The management of Essex consists of the same members as the management of EPLP.

All of the Company's property ownership, development and related business operations are conducted through the Operating Partnership and Essex has no material assets, other than its investment in EPLP. Essex's primary function is acting as the general partner of EPLP.  As general partner with control of the Operating Partnership, the Company consolidates the Operating Partnership for financial reporting purposes. Therefore, the assets and liabilities of the Company and the Operating Partnership are the same on their respective financial statements.  Essex also issues equity from time to time and guarantees certain debt of EPLP, as disclosed in this report. The Operating Partnership holds substantially all of the assets of the Company, including the Company's ownership interests in its joint ventures. The Operating Partnership conducts the operations of the business and is structured as a partnership with no publicly traded equity.  Except for the net proceeds from equity offerings by the Company, which are contributed to the capital of the Operating Partnership in exchange for additional limited partnership interests in the Operating Partnership (“OP Units”) (on a one-for-one share of common stock per OP Unit basis), the Operating Partnership generates all remaining capital required by the Company's business. These sources include the Operating Partnership's working capital, net cash provided by operating activities, borrowings under its revolving credit facilities, the issuance of secured and unsecured debt and equity securities and proceeds received from disposition of certain properties and joint ventures.

The Company believes it is important to understand the few differences between Essex and EPLP in the context of how Essex and EPLP operate as a consolidated company.  Stockholders' equity, partners' capital and noncontrolling interest are the main areas of difference between the consolidated financial statements of the Company and those of the Operating Partnership. The limited partners of the Operating Partnership are accounted for as partners' capital in the Operating Partnership's consolidated financial statements and as noncontrolling interest in Essex’s consolidated financial statements. The noncontrolling interest in the Operating Partnership's consolidated financial statements include the interest of unaffiliated partners in various consolidated partnerships and joint venture partners. The noncontrolling interest in the Company's  consolidated financial statements include (i) the same noncontrolling interest as presented in the Operating Partnership’s consolidated financial statements and (ii) limited partner OP Unitholders of the Operating Partnership. The differences between stockholders' equity and partners' capital result from differences in the equity issued at the Company and Operating Partnership levels.
 

iii

To help investors understand the significant differences between the Company and the Operating Partnership, this report provides separate consolidated financial statements for the Company and the Operating Partnership; a single set of consolidated notes to such financial statements that includes separate discussions of stockholders' equity or partners' capital, and earnings per share/unit, as applicable; and a combined Management's Discussion and Analysis of Financial Condition and Results of Operations.

This report also includes separate Part I, Item 4. Controls and Procedures sections and separate Exhibits 31 and 32 certifications for each of the Company and the Operating Partnership in order to establish that the requisite certifications have been made and that the Company and the Operating Partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934 and 18 U.S.C. §1350.

In order to highlight the differences between the Company and the Operating Partnership, the separate sections in this report for the Company and the Operating Partnership specifically refer to the Company and the Operating Partnership. In the sections that combine disclosure of the Company and the Operating Partnership, this report refers to actions or holdings as being actions or holdings of the Company. Although the Operating Partnership is generally the entity that directly or indirectly enters into contracts and joint ventures and holds assets and debt, reference to the Company is appropriate because the Company is one business and the Company operates that business through the Operating Partnership. The separate discussions of the Company and the Operating Partnership in this report should be read in conjunction with each other to understand the results of the Company on a consolidated basis and how management operates the Company.

The information furnished in the accompanying unaudited condensed consolidated balance sheets, statements of income and comprehensive income, equity, capital, and cash flows of the Company and the Operating Partnership reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the aforementioned condensed consolidated financial statements for the interim periods and are normal and recurring in nature, except as otherwise noted.

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the notes to such unaudited condensed consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations herein.  Additionally, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's annual report on Form 10-K for the year ended December 31, 2014.






























iv

ESSEX PROPERTY TRUST, INC.
ESSEX PORTFOLIO, L.P.
FORM 10-Q
INDEX

PART I. FINANCIAL INFORMATION
Page No.
 
 
 
Item 1.
 
 
 
Condensed Consolidated Financial Statements of Essex Property Trust, Inc. (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Financial Statements of Essex Portfolio L.P. (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 

1

Part I – Financial Information

Item 1. Condensed Financial Statements

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except share amounts)
ASSETS
June 30, 2015
 
December 31, 2014
Real estate:
 
 
 
Rental properties:
 
 
 
Land and land improvements
$
2,569,733

 
$
2,424,930

Buildings and improvements
9,700,056

 
8,819,751

 
12,269,789

 
11,244,681

Less accumulated depreciation
(1,758,887
)
 
(1,564,806
)
 
10,510,902

 
9,679,875

Real estate under development
220,911

 
429,096

Co-investments
1,044,208

 
1,042,423

Real estate held for sale, net
—

 
56,300

 
11,776,021

 
11,207,694

Cash and cash equivalents-unrestricted
30,242

 
25,610

Cash and cash equivalents-restricted
34,910

 
70,139

Marketable securities and other investments
121,244

 
117,240

Notes and other receivables
25,676

 
24,923

Acquired in place lease value
25,907

 
47,748

Prepaid expenses and other assets
31,004

 
33,378

Total assets
$
12,045,004

 
$
11,526,732

 
 
 
 
LIABILITIES AND EQUITY
 

 
 

Mortgage notes payable, net
$
2,247,463

 
$
2,234,317

Unsecured debt, net
3,093,106

 
2,603,548

Lines of credit, net
28,762

 
242,824

Accounts payable and accrued liabilities
146,251

 
135,162

Construction payable
26,596

 
30,892

Dividends payable
99,687

 
88,221

Other liabilities
34,669

 
32,444

Total liabilities
5,676,534

 
5,367,408

Commitments and contingencies


 


Redeemable noncontrolling interest
23,830

 
23,256

Equity:
 

 
 

Common stock; $0.0001 par value, 656,020,000 shares authorized; 65,042,681 and 63,682,646 shares issued and outstanding, respectively
6

 
6

   Cumulative redeemable 7.125% Series H preferred stock at liquidation value
73,750

 
73,750

Additional paid-in capital
6,941,629

 
6,651,165

Distributions in excess of accumulated earnings
(731,181
)
 
(650,797
)
Accumulated other comprehensive loss, net
(50,152
)
 
(51,452
)
Total stockholders' equity
6,234,052

 
6,022,672

Noncontrolling interest
110,588

 
113,396

Total equity
6,344,640

 
6,136,068

Total liabilities and equity
$
12,045,004

 
$
11,526,732


See accompanying notes to the unaudited condensed consolidated financial statements.

2


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income and Comprehensive Income
(Unaudited)
(In thousands, except share and per share amounts)

 
Three Months Ended 
 June 30,
 
Six Months Ended 
June 30,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Rental and other property
$
294,101

 
$
256,952

 
$
574,330

 
$
416,302

Management and other fees from affiliates
2,061

 
2,836

 
4,705

 
4,495

 
296,162

 
259,788

 
579,035

 
420,797

Expenses:
 

 
 

 
 
 
 
Property operating, excluding real estate taxes
57,400

 
53,213

 
113,019

 
90,180

Real estate taxes
32,677

 
30,345

 
64,229

 
45,684

Depreciation and amortization
113,731

 
101,292

 
220,638

 
151,604

General and administrative
9,549

 
9,558

 
20,094

 
17,141

Merger and integration expenses
1,410

 
26,497

 
3,798

 
42,556

Acquisition costs
429

 
529

 
976

 
717

 
215,196

 
221,434

 
422,754

 
347,882

Earnings from operations
80,966

 
38,354

 
156,281

 
72,915

Interest expense
(50,802
)
 
(42,151
)
 
(98,348
)
 
(71,192
)
Interest and other income
3,254

 
2,814

 
7,453

 
5,693

Equity income in co-investments
4,472

 
5,629

 
8,783

 
16,155

Gains on sale of real estate and land
—

 
—

 
7,112

 
7,481

Gain on remeasurement of co-investment
12,652

 
—

 
34,014

 
—

Net income
50,542

 
4,646

 
115,295

 
31,052

Net income attributable to noncontrolling interest
(3,674
)
 
(2,125
)
 
(7,750
)
 
(5,251
)
Net income attributable to controlling interest
46,868

 
2,521

 
107,545

 
25,801

Dividends to preferred stockholders
(1,313
)
 
(1,314
)
 
(2,627
)
 
(2,682
)
Net income available to common stockholders
$
45,555

 
$
1,207

 
$
104,918

 
$
23,119

Comprehensive income
$
51,287

 
$
7,306

 
$
116,639

 
$
38,035

Comprehensive income attributable to noncontrolling interest
(3,703
)
 
(2,184
)
 
(7,794
)
 
(5,556
)
Comprehensive income attributable to controlling interest
$
47,584

 
$
5,122

 
$
108,845

 
$
32,479

Per share data:
 

 
 

 
 
 
 
Basic:
 

 
 

 
 
 
 
Net income available to common stockholders
$
0.70

 
$
0.02

 
$
1.63

 
$
0.46

Weighted average number of shares outstanding during the period
64,810,184

 
61,884,963

 
64,499,545

 
49,857,233

Diluted:
 

 
 

 
 
 
 
Net income available to common stockholders
$
0.70

 
$
0.02

 
$
1.62

 
$
0.46

Weighted average number of shares outstanding during the period
64,972,852

 
62,059,762

 
64,677,521

 
50,087,161

Dividend per common share
$
1.44

 
$
1.30

 
$
2.88

 
$
2.51


See accompanying notes to the unaudited condensed consolidated financial statements.

3

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Equity for the six months ended June 30, 2015
(Unaudited)
(Dollars and shares in thousands)
 
Series H
Preferred stock
 
Common stock
 
Additional
paid-in
 
Distributions
in excess of
accumulated
 
Accumulated
other
comprehensive
 
Noncontrolling
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
capital
 
earnings
 
loss, net
 
Interest
 
Total
Balances at December 31, 2014
2,950

 
$
73,750

 
63,683

 
$
6

 
$
6,651,165

 
$
(650,797
)
 
$
(51,452
)
 
$
113,396

 
$
6,136,068

Net income
—

 
—

 
—

 
—

 
—

 
107,545

 
—

 
7,750

 
115,295

Change in fair value of derivatives and amortization of swap settlements
—

 
—

 
—

 
—

 
—

 
—

 
3,354

 
111

 
3,465

Change in fair value of marketable securities
—

 
—

 
—

 
—

 
—

 
—

 
(2,054
)
 
(67
)
 
(2,121
)
Issuance of common stock under:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Stock option and restricted stock plans
—

 
—

 
140

 
—

 
18,346

 
—

 
—

 
—

 
18,346

Sale of common stock
—

 
—

 
1,220

 
—

 
272,664

 
—

 
—

 
—

 
272,664

Equity based compensation costs
—

 
—

 
—

 
—

 
1,921

 
—

 
—

 
1,536

 
3,457

Reclassification of noncontrolling interest to redeemable noncontrolling interest
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(144
)
 
(144
)
Changes in the redemption value of redeemable noncontrolling interest
—

 
—

 
—

 
—

 
(384
)
 
—

 
—

 
—

 
(384
)
Distributions to noncontrolling interest
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(11,589
)
 
(11,589
)
Redemptions of noncontrolling interest
—

 
—

 
—

 
—

 
(2,083
)
 
—

 
—

 
(405
)
 
(2,488
)
Common and preferred stock dividends
—

 
—

 
—

 
—

 
—

 
(187,929
)
 
—

 
—

 
(187,929
)
Balances at June 30, 2015
2,950

 
$
73,750

 
65,043

 
$
6

 
$
6,941,629

 
$
(731,181
)
 
$
(50,152
)
 
$
110,588

 
$
6,344,640


See accompanying notes to the unaudited condensed consolidated financial statements.

4

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands) 
 
Six Months Ended 
 June 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
115,295

 
$
31,052

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
220,638

 
151,604

Amortization of discount on marketable securities
(5,777
)
 
(3,965
)
Amortization of (premium) discount and debt financing costs, net
(11,125
)
 
(846
)
Gain on sale of marketable securities
—

 
(886
)
Company's share of gain on the sales of co-investment
(469
)
 
(3,211
)
Earnings from co-investments
(8,314
)
 
(12,944
)
Operating distributions from co-investments
14,804

 
12,091

Gains on the sales of real estate and land
(7,112
)
 
(7,481
)
Non cash merger and integration expenses
—

 
7,562

Equity-based compensation
3,457

 
3,625

Gain on remeasurement of co-investments
(34,014
)
 
—

Changes in operating assets and liabilities:
 
 
 
   Prepaid expense, receivables and other assets
(6,646
)
 
2,425

Accounts payable and accrued liabilities
4,924

 
9,299

Other liabilities
1,387

 
665

Net cash provided by operating activities
287,048

 
188,990

Cash flows from investing activities:
 

 
 

Additions to real estate:
 

 
 

Acquisitions of real estate and acquisition related capital expenditures
(314,890
)
 
(108,820
)
Redevelopment
(41,796
)
 
(31,470
)
Development acquisitions of and additions to real estate under development
(122,377
)
 
(58,899
)
Capital expenditures on rental properties
(24,673
)
 
(13,710
)
Acquisition of membership interest in co-investments
(115,724
)
 
—

Proceeds from insurance for property losses
11,735

 
10,000

Proceeds from dispositions of real estate
74,485

 
14,123

BRE merger consideration paid
—

 
(555,826
)
Proceeds from dispositions of co-investments
11,072

 
13,900

Contributions to co-investments
(97,512
)
 
(58,029
)
Changes in restricted cash and refundable deposits
49,808

 
(3,606
)
Purchases of marketable securities
(7,250
)
 
(14,341
)
Sales and maturities of marketable securities
1,968

 
5,192

Collections of notes and other receivables
—

 
56,750

Non-operating distributions from co-investments
—

 
8,599

Net cash used in investing activities
(575,154
)
 
(736,137
)
Cash flows from financing activities:
 

 
 

Borrowings under debt agreements
923,431

 
1,321,044

Repayment of debt
(730,712
)
 
(1,077,210
)
Additions to deferred charges
(4,456
)
 
(16,401
)
Net proceeds from issuance of common stock
272,664

 
278,334

Net proceeds from stock options exercises
18,346

 
5,503

Distributions to noncontrolling interest
(11,033
)
 
(7,510
)
Redemption of noncontrolling interest
(2,488
)
 
(2,550
)
Common and preferred stock dividends paid
(177,019
)
 
(94,961
)
Net cash provided by financing activities
288,733

 
406,249


5

 
Six Months Ended 
 June 30,
 
2015
 
2014
Cash acquired from the BRE merger
—

 
140,353

Cash acquired in consolidation of co-investment
4,005

 
—

Net increase (decrease) in cash and cash equivalents
4,632

 
(545
)
Cash and cash equivalents at beginning of period
25,610

 
18,491

Cash and cash equivalents at end of period
$
30,242

 
$
17,946

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest, net of $8.3 million and $11.7 million capitalized in 2015 and 2014, respectively
$
86,347

 
$
44,437

Supplemental disclosure of noncash investing and financing activities:
 

 
 

Issuance of Operating Partnership units for contributed properties
$
—

 
$
1,419,816

Retirement of Operating Partnership units
$
—

 
$
(1,419,816
)
Transfer from real estate under development to rental properties
$
300,751

 
$
4,580

Transfer from real estate under development to co-investments
$
3,780

 
$
49,776

Reclassifications of and changes in redeemable noncontrolling interest from additional paid in capital and noncontrolling interest
$
574

 
$
18,766

Debt assumed in connection with acquisition of co-investment
$
114,435

 
$
—


See accompanying notes to the unaudited condensed consolidated financial statements.


6

ESSEX PORTFOLIO, L.P.  AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except unit amounts)
 
June 30, 2015
 
December 31, 2014
ASSETS
 
 
 
Real estate:
 
 
 
Rental properties:
 
 
 
Land and land improvements
$
2,569,733

 
$
2,424,930

Buildings and improvements
9,700,056

 
8,819,751

 
12,269,789

 
11,244,681

Less accumulated depreciation
(1,758,887
)
 
(1,564,806
)
 
10,510,902

 
9,679,875

Real estate under development
220,911

 
429,096

Co-investments
1,044,208

 
1,042,423

Real estate held for sale, net
—

 
56,300

 
11,776,021

 
11,207,694

Cash and cash equivalents-unrestricted
30,242

 
25,610

Cash and cash equivalents-restricted
34,910

 
70,139

Marketable securities and other investments
121,244

 
117,240

Notes and other receivables
25,676

 
24,923

Acquired in place lease value
25,907

 
47,748

Prepaid expenses and other asset
31,004

 
33,378

Total assets
$
12,045,004

 
$
11,526,732

 
 
 
 
LIABILITIES AND CAPITAL
 

 
 

Mortgage notes payable, net
$
2,247,463

 
$
2,234,317

Unsecured debt, net
3,093,106

 
2,603,548

Lines of credit, net
28,762

 
242,824

Accounts payable and accrued liabilities
146,251

 
135,162

Construction payable
26,596

 
30,892

Distributions payable
99,687

 
88,221

Other liabilities
34,669

 
32,444

Total liabilities
5,676,534

 
5,367,408

Commitments and contingencies


 


Redeemable noncontrolling interest
23,830

 
23,256

Capital:
 

 
 

General Partner:
 
 
 
   Common equity (65,042,681 and 63,682,646 units issued and outstanding, respectively)
6,212,995

 
6,002,915

   Series H 7.125% Preferred interest (liquidation value of $73,750)
71,209

 
71,209

 
6,284,204

 
6,074,124

Limited Partners:
 
 
 
   Common equity (2,181,076 and 2,168,158 units issued and outstanding, respectively)
46,963

 
48,665

    Accumulated other comprehensive loss
(48,012
)
 
(49,356
)
Total partners' capital
6,283,155

 
6,073,433

Noncontrolling interest
61,485

 
62,635

Total capital
6,344,640

 
6,136,068

Total liabilities and capital
$
12,045,004

 
$
11,526,732

 
See accompanying notes to the unaudited condensed consolidated financial statements.

7

ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Condensed Consolidated Statements of Income and Comprehensive Income
(Unaudited)
(In thousands, except unit and per unit amounts)
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Rental and other property
$
294,101

 
$
256,952

 
$
574,330

 
$
416,302

Management and other fees from affiliates
2,061

 
2,836

 
4,705

 
4,495

 
296,162

 
259,788

 
579,035

 
420,797

Expenses:
 

 
 

 
 
 
 
Property operating, excluding real estate taxes
57,400

 
53,213

 
113,019

 
90,180

Real estate taxes
32,677

 
30,345

 
64,229

 
45,684

Depreciation and amortization
113,731

 
101,292

 
220,638

 
151,604

General and administrative
9,549

 
9,558

 
20,094

 
17,141

Merger and integration expenses
1,410

 
26,497

 
3,798

 
42,556

Acquisition costs
429

 
529

 
976

 
717

 
215,196

 
221,434

 
422,754

 
347,882

Earnings from operations
80,966

 
38,354

 
156,281

 
72,915

Interest expense
(50,802
)
 
(42,151
)
 
(98,348
)
 
(71,192
)
Interest and other income
3,254

 
2,814

 
7,453

 
5,693

Equity income in co-investments
4,472

 
5,629

 
8,783

 
16,155

Gains on sale of real estate and land
—

 
—

 
7,112

 
7,481

Gain on remeasurement of co-investment
12,652

 
—

 
34,014

 
—

Net income
50,542

 
4,646

 
115,295

 
31,052

Net income attributable to noncontrolling interest
(2,141
)
 
(1,916
)
 
(4,106
)
 
(3,625
)
Net income attributable to controlling interest
48,401

 
2,730

 
111,189

 
27,427

Preferred interest distributions
(1,313
)
 
(1,314
)
 
(2,627
)
 
(2,682
)
Net income available to common unitholders
$
47,088

 
$
1,416

 
$
108,562

 
$
24,745

Comprehensive income
$
51,287

 
$
7,306

 
$
116,639

 
$
38,035

Comprehensive income attributable to noncontrolling interest
(2,141
)
 
(1,916
)
 
(4,106
)
 
(3,625
)
Comprehensive income attributable to controlling interest
$
49,146

 
$
5,390

 
$
112,533

 
$
34,410

Per unit data:
 

 
 

 
 
 
 
Basic:
 

 
 

 
 
 
 
Net income available to common unitholders
$
0.70

 
$
0.02

 
$
1.63

 
$
0.47

Weighted average number of common units outstanding during the period
66,992,209

 
64,058,505

 
66,682,708

 
52,127,261

Diluted:
 
 
 
 
 
 
 
Net income available to common unitholders
$
0.70

 
$
0.02

 
$
1.62

 
$
0.47

Weighted average number of common units outstanding during the period
67,154,877

 
64,233,304

 
66,860,684

 
52,357,189

Distribution per common unit
$
1.44

 
$
1.30

 
$
2.88

 
$
2.51


See accompanying notes to the unaudited condensed consolidated financial statements.

8

ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Condensed Consolidated Statement of Capital for the six months ended June 30, 2015
(Dollars and units in thousands)
(Unaudited)
 
General Partner
 
Limited Partners
 
Accumulated
 
 
 
 
 
 
 
 
 
Preferred
 
 
 
 
 
Other
 
 
 
 
 
Common Equity
 
Equity
 
Common Equity
 
Comprehensive
 
Noncontrolling
 
 
 
Units
 
Amount
 
Amount
 
Units
 
Amount
 
(Loss) Income
 
Interest
 
Total
Balances at December 31, 2014
63,683

 
$
6,002,915

 
$
71,209

 
2,168

 
$
48,665

 
$
(49,356
)
 
$
62,635

 
$
6,136,068

Net income
—

 
104,918

 
2,627

 
—

 
3,644

 
—

 
4,106

 
115,295

Change in fair value of derivatives and amortization of swap settlements
—

 
—

 
—

 
—

 
—

 
3,465

 
—

 
3,465

Change in fair value of marketable securities
—

 
—

 
—

 
—

 
—

 
(2,121
)
 
—

 
(2,121
)
Issuance of common units under:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

General partner's stock based compensation
140

 
18,346

 
—

 
17

 
1,536

 
—

 
—

 
19,882

Sale of common stock by general partner
1,220

 
272,664

 
—

 
—

 
—

 
—

 
—

 
272,664

Equity based compensation costs
—

 
1,921

 
—

 
—

 
—

 
—

 
—

 
1,921

Changes in redemption value of redeemable noncontrolling interest
—

 
(384
)
 
—

 
—

 
—

 
—

 
—

 
(384
)
Reclassification of noncontrolling interest to redeemable noncontrolling interest
—

 
—

 
—

 
—

 
—

 
—

 
(144
)
 
(144
)
Distributions to noncontrolling interest
—

 
—

 
—

 
—

 
—

 
—

 
(5,112
)
 
(5,112
)
Redemptions
—

 
(2,083
)
 
—

 
(4
)
 
(405
)
 
—

 
—

 
(2,488
)
Distributions declared
—

 
(185,302
)
 
(2,627
)
 
—

 
(6,477
)
 
—

 
—

 
(194,406
)
Balances at June 30, 2015
65,043

 
$
6,212,995

 
$
71,209

 
2,181

 
$
46,963

 
$
(48,012
)
 
$
61,485

 
$
6,344,640



See accompanying notes to the unaudited condensed consolidated financial statements.

9

ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
 
Six Months Ended 
 June 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
115,295

 
$
31,052

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
220,638

 
151,604

Amortization of discount on marketable securities
(5,777
)
 
(3,965
)
Amortization of (premium) discount and debt financing costs, net
(11,125
)
 
(846
)
Gain on sale of marketable securities
—

 
(886
)
Company's share of gain on the sales of co-investment
(469
)
 
(3,211
)
Earnings from co-investments
(8,314
)
 
(12,944
)
Operating distributions from co-investments
14,804

 
12,091

Gain on the sales of real estate and land
(7,112
)
 
(7,481
)
Non cash merger and integration expenses
—

 
7,562

Equity-based compensation
3,457

 
3,625

Gain on remeasurement of co-investments
(34,014
)
 
—

Changes in operating assets and liabilities:
 

 
 

Prepaid expense, in-place lease value, receivables and other assets
(6,646
)
 
2,425

Accounts payable and accrued liabilities
4,924

 
9,299

Other liabilities
1,387

 
665

Net cash provided by operating activities
287,048

 
188,990

Cash flows from investing activities:
 

 
 

Additions to real estate:
 

 
 

Acquisitions of real estate and acquisition related capital expenditures
(314,890
)
 
(108,820
)
Redevelopment
(41,796
)
 
(31,470
)
Development acquisitions of and additions to real estate under development
(122,377
)
 
(58,899
)
Capital expenditures on rental properties
(24,673
)
 
(13,710
)
Acquisition of membership interest in co-investments
(115,724
)
 
—

Proceeds from insurance for property losses
11,735

 
10,000

Proceeds from dispositions of real estate
74,485

 
14,123

BRE merger cash consideration paid
—

 
(555,826
)
Proceeds from dispositions of co-investments
11,072

 
13,900

Contributions to co-investments
(97,512
)
 
(58,029
)
Changes in restricted cash and refundable deposits
49,808

 
(3,606
)
Purchases of marketable securities
(7,250
)
 
(14,341
)
Sales and maturities of marketable securities
1,968

 
5,192

Collections of notes and other receivables
—

 
56,750

Non-operating distributions from co-investments
—

 
8,599

Net cash used in investing activities
(575,154
)
 
(736,137
)
Cash flows from financing activities:
 

 
 

Borrowings under debt agreements
923,431

 
1,321,044

Repayment of debt
(730,712
)
 
(1,077,210
)
Additions to deferred charges
(4,456
)
 
(16,401
)
Net proceeds from issuance of common units
272,664

 
278,334

Net proceeds from stock options exercises
18,346

 
5,503

Distributions to noncontrolling interest
(4,884
)
 
(2,045
)
Redemption of noncontrolling interest
(2,488
)
 
(414
)
Common and preferred units and preferred interest distributions paid
(183,168
)
 
(102,562
)
Net cash provided by financing activities
288,733

 
406,249


10

 
Six Months Ended 
 June 30,
 
2015
 
2014
Cash acquired from the BRE merger
—

 
140,353

Cash acquired in consolidation of co-investment
4,005

 
—

Net increase (decrease) in cash and cash equivalents
4,632

 
(545
)
Cash and cash equivalents at beginning of period
25,610

 
18,491

Cash and cash equivalents at end of period
$
30,242

 
$
17,946

  
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest, net of $8.3 million and $11.7 million capitalized in 2015 and 2014, respectively
$
86,347

 
$
44,437

Supplemental disclosure of noncash investing and financing activities:
 

 
 

Issuance of Operating Partnership units for contributed properties
$
—

 
$
1,419,816

Retirement of Operating Partnership units
$
—

 
$
(1,419,816
)
Transfer from real estate under development to rental properties
$
300,751

 
$
4,580

Transfer from real estate under development to co-investments
$
3,780

 
$
47,776

Reclassification of and changes in redeemable noncontrolling interest from common equity and noncontrolling interest
$
574

 
$
18,766

  Debt assumed in connection with acquisition of co-investment
$
114,435

 
$
—


See accompanying notes to the unaudited condensed consolidated financial statements.

11

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2015 and 2014
(Unaudited)

(1) Organization and Basis of Presentation

The accompanying unaudited condensed consolidated financial statements present the accounts of Essex Property Trust, Inc. (“Essex” or the “Company”), which include the accounts of the Company and Essex Portfolio, L.P. and subsidiaries (the “Operating Partnership,” which holds the operating assets of the Company), prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q.  In the opinion of management, all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented have been included and are normal and recurring in nature.  These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's annual report on Form 10-K for the year ended December 31, 2014.

All significant intercompany balances and transactions have been eliminated in the condensed consolidated financial statements. Certain reclassifications have been made to conform to the current year’s presentation.

The unaudited condensed consolidated financial statements for the three and six months ended June 30, 2015 and 2014 include the accounts of the Company and the Operating Partnership.  Essex is the sole general partner in the Operating Partnership, with a 96.8% general partnership interest as of June 30, 2015.  Total Operating Partnership limited partnership units outstanding were 2,181,076 and 2,168,158 as of June 30, 2015 and December 31, 2014, respectively, and the redemption value of the units, based on the closing price of the Company’s common stock totaled $463.5 million and $447.9 million, as of June 30, 2015 and December 31, 2014, respectively.

As of June 30, 2015, the Company owned or had ownership interests in 245 apartment communities, aggregating 58,768 units, excluding the Company’s ownership in preferred interest co-investments,  (collectively, the “Communities”, and individually, a “Community”), four commercial buildings and nine active developments (collectively, the “Portfolio”).  The Communities are located in Southern California (primarily Los Angeles, Orange, San Diego, and Ventura counties), Northern California (the San Francisco Bay Area) and the Seattle metropolitan areas.

New Accounting Pronouncements

In February 2015, the FASB issued ASU No. 2015-02 "Consolidation (Topic 810): Amendments to the Consolidation Analysis," which provides new consolidation guidance and makes changes to both the variable interest model and the voting model. Among other changes, the new standard specifically eliminates the presumption in the current voting model that a general partner controls a limited partnership or similar entity unless that presumption can be overcome. Generally, only a single limited partner that is able to exercise substantive kick-out rights will consolidate. The new standard will be effective for the Company beginning on January 1, 2016 and early adoption is permitted, including adoption in an interim period. The new standard must be applied using a modified retrospective approach by recording a cumulative-effect adjustment to equity/capital as of the beginning of the period of adoption or retrospectively to each period presented. The Company has not yet selected a transition method and is currently evaluating the impact of adopting the new standard on its consolidated results of operations and financial position.

In April 2015, the FASB issued ASU No. 2015-03 "Simplifying the Presentation of Debt Issuance Costs," which requires companies to present debt financing costs as a direct deduction from the carrying amount of the associated debt liability rather than as an asset, consistent with the presentation of debt discounts on the consolidated balance sheets.  The new standard will be effective for the Company beginning on January 1, 2016 and early adoption is permitted.  The new standard must be applied retrospectively to all prior periods presented in the consolidated financial statements.  The Company adopted this standard during the second quarter of 2015. This adoption resulted in a reclassification of $32.1 million and $29.4 million in debt issuance costs, net of accumulated amortization from an asset to a reduction to associated debt liabilities as of June 30, 2015 and December 31, 2014, respectively.

Marketable Securities

The Company reports its available for sale securities at fair value, based on quoted market prices (Level 2 for the unsecured bonds and Level 1 for the common stock and investment funds, as defined by the Financial Accounting Standards Board

12

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2015 and 2014
(Unaudited)

(“FASB”) standard for fair value measurements), and any unrealized gain or loss is recorded as other comprehensive income (loss).  Realized gains and losses, interest and dividend income, and amortization of purchase discounts are included in interest and other income on the condensed consolidated statements of income and comprehensive income.

As of June 30, 2015 and December 31, 2014, marketable securities consisted primarily of investment-grade unsecured bonds, common stock, investments in mortgage backed securities and investment funds that invest in US treasury or agency securities.  As of June 30, 2015 and December 31, 2014, the Company classified its investments in mortgage backed securities, which mature through November 2019 and September 2020, as held to maturity, and accordingly, these securities are stated at their amortized cost.  As of June 30, 2015 and December 31, 2014, marketable securities consist of the following ($ in thousands):

 
June 30, 2015
 
Amortized
Cost
 
Gross
Unrealized
Gain
 
Carrying Value
Available for sale:
 
 
 
 
 
Investment-grade unsecured bonds
$
8,746

 
$
149

 
$
8,895

Investment funds - US treasuries
3,769

 
6

 
3,775

Common stock and stock funds
31,755

 
3,076

 
34,831

Held to maturity:
 

 
 

 
 

Mortgage backed securities
73,743

 
—

 
73,743

Total - Marketable securities and other investments
$
118,013

 
$
3,231

 
$
121,244

 
 
 
 
 
 
 
December 31, 2014
 
Amortized
Cost
 
Gross
Unrealized
Gain
 
Carrying Value
Available for sale:
 

 
 

 
 

Investment-grade unsecured bonds
$
9,435

 
$
145

 
$
9,580

Investment funds - US treasuries
3,769

 
3

 
3,772

Common stock and stock funds
25,755

 
5,137

 
30,892

Held to maturity:
 

 
 

 
 

Mortgage backed securities
67,996

 
—

 
67,996

Total - marketable securities
$
106,955

 
$
5,285

 
$
112,240

  Other investments
5,000

 
—

 
5,000

Total - Marketable securities and other investments
$
111,955

 
$
5,285

 
$
117,240


The Company uses the specific identification method to determine the cost basis of a security sold and to reclassify amounts from accumulated other comprehensive income for securities sold.  For the six months ended June 30, 2015 and 2014, the proceeds from sales of available for sale securities totaled $2.0 million and $5.2 million, respectively, which resulted in no realized gains or losses and gains of $0.9 million, respectively.

Variable Interest Entities

The Company consolidates 19 DownREIT limited partnerships (comprising twelve communities) since the Company is the primary beneficiary of these variable interest entities (“VIEs”).  Total DownREIT units outstanding were 963,789 and 974,790 as of June 30, 2015 and December 31, 2014 respectively, and the redemption value of the units, based on the closing price of the Company’s common stock totaled $204.8 million and $201.4 million, as of June 30, 2015 and December 31, 2014, respectively.  The consolidated total assets and liabilities related to these VIEs, net of intercompany eliminations, were approximately $236.5 million and $207.9 million, respectively, as of June 30, 2015 and $235.1 million and $209.1 million,

13

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2015 and 2014
(Unaudited)

respectively, as of December 31, 2014.  Interest holders in VIEs consolidated by the Company are allocated income equal to the cash distributions made to those interest holders.  The remaining results of operations are allocated to the Company.  As of June 30, 2015 and December 31, 2014, the Company did not have any other VIEs of which it was deemed to be the primary beneficiary.

Equity Based Compensation

The Company accounts for equity based compensation using the fair value method of accounting.  The estimated fair value of stock options granted by the Company is being amortized over the vesting period of the stock options.  The estimated grant date fair values of the long term incentive plan units (discussed in Note 13, “Equity Based Compensation Plans,” in the Company’s Form 10-K for the year ended December 31, 2014) are being amortized over the expected service periods.

Fair Value of Financial Instruments

Management believes that the carrying amounts of outstanding lines of credit, and notes and other receivables approximate fair value as of June 30, 2015 and December 31, 2014, because interest rates, yields and other terms for these instruments are consistent with yields and other terms currently available for similar instruments.  Management has estimated that the fair value of the Company’s $4.8 billion of fixed rate debt, including unsecured bonds, at June 30, 2015 is approximately $4.9 billion and the Company’s variable rate debt, excluding borrowings under the lines of credit, at June 30, 2015 approximates its fair value based on the terms of existing mortgage notes payable, unsecured bonds and variable rate demand notes compared to those available in the marketplace.  Management believes that the carrying amounts of cash and cash equivalents, restricted cash, accounts payable and accrued liabilities, construction payables, other liabilities and dividends payable approximate fair value as of June 30, 2015 due to the short-term maturity of these instruments.  Marketable securities, except mortgage backed securities that are held to maturity, and derivatives are carried at fair value as of June 30, 2015.

At June 30, 2015, the Company’s investments in mortgage backed securities had a carrying value of $73.7 million and the Company estimated the fair value to be approximately $101.9 million.  At December 31, 2014, the Company’s investments in mortgage backed securities had a carrying value of $68.0 million and the Company estimated the fair value to be approximately $96.0 million.  The Company determines the fair value of the mortgage backed securities based on unobservable inputs (level 3 of the fair value hierarchy) considering the assumptions that market participants would make in valuing these securities.  Assumptions such as estimated default rates and discount rates are used to determine expected discounted cash flows to estimate the fair value.
 
Capitalization of Costs

The Company’s capitalized internal costs related to development and redevelopment projects were comprised primarily of employee compensation and totaled $3.4 million and $3.0 million during the three months ended June 30, 2015 and 2014, respectively, and $5.4 million and $4.7 million during the six months ended June 30, 2015 and 2014, respectively. The Company capitalizes leasing commissions associated with the lease-up of a development community and amortizes the costs over the life of the leases.  The amounts capitalized for leasing commissions are immaterial for all periods presented.

Co-investments

The Company owns investments in joint ventures (“co-investments”) in which it has significant influence, but its ownership interest does not meet the criteria for consolidation in accordance with U.S. GAAP.  Therefore, the Company accounts for co-investments using the equity method of accounting.  The equity method employs the accrual basis for recognizing the investor’s share of investee income or losses. In addition, distributions received from the investee are treated as a reduction in the investment account, not as income.  The significant accounting policies of the Company’s co-investment entities are consistent with those of the Company in all material respects.

Upon the acquisition of a controlling interest of a co-investment, the co-investment entity is consolidated and a gain or loss is recognized upon the remeasurement of co-investments in the condensed consolidated statement of income equal to the amount by which the fair value of the co-investment interest the Company previously owned exceeds its carrying value.  A majority of the co-investments, excluding the preferred equity investments, compensate the Company for its asset management services and may provide promote income if certain financial return benchmarks are achieved.  Asset management fees are recognized when

14

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2015 and 2014
(Unaudited)

earned, and promote fees are recognized when the earnings events have occurred and the amount is determinable and collectible. Any promote fees are reflected in equity income in co-investments.

Changes in Accumulated Other Comprehensive Loss, Net by Component

Essex Property Trust, Inc.
(in thousands)
 
Change in fair
value and amortization
of derivatives
 
Unrealized
gains on
available for sale
securities
 
Total
Balance at December 31, 2014
$
(56,003
)
 
$
4,551

 
$
(51,452
)
Other comprehensive income before reclassification
(2,461
)
 
(2,054
)
 
(4,515
)
Amounts reclassified from accumulated other comprehensive loss
5,815

 
—

 
5,815

Other comprehensive income
3,354

 
(2,054
)
 
1,300

Balance at June 30, 2015
$
(52,649
)
 
$
2,497

 
$
(50,152
)

Changes in Accumulated Other Comprehensive Loss, by Component

Essex Portfolio, L.P.
(in thousands):
 
Change in fair
value and amortization
of derivatives
 
Unrealized
gains on
available for sale
securities
 
Total
Balance at December 31, 2014
$
(53,980
)
 
$
4,624

 
$
(49,356
)
Other comprehensive income before reclassification
(2,546
)
 
(2,121
)
 
(4,667
)
Amounts reclassified from accumulated other comprehensive loss
6,011

 
—

 
6,011

Other comprehensive income
3,465

 
(2,121
)
 
1,344

Balance at June 30, 2015
$
(50,515
)
 
$
2,503

 
$
(48,012
)

Amounts reclassified from accumulated other comprehensive loss in connection with derivatives are recorded in interest expense on the condensed consolidated statement of income and comprehensive income.  Realized gains and losses on available for sale securities are included in interest and other income on the condensed consolidated statement of income and comprehensive income.

Accounting Estimates

The preparation of condensed consolidated financial statements, in accordance with GAAP, requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to acquiring, developing and assessing the carrying values of its real estate portfolio, its investments in and advances to joint ventures and affiliates, its notes receivables and its qualification as a Real Estate Investment Trust (“REIT”). The Company bases its estimates on historical experience, current market conditions, and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may vary from those estimates and those estimates could be different under different assumptions or conditions.

BRE Merger

The merger with BRE Properties, Inc. ("BRE") was a two step process. First, 14 of the BRE properties were acquired on March 31, 2014 in exchange for $1.4 billion of OP units.  The fair value of these properties was substantially all attributable to rental properties which included land, buildings and improvements, and real estate under development and approximately $19 million

15

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2015 and 2014
(Unaudited)

was attributable to acquired in-place lease value.  Second, the BRE merger was closed on April 1, 2014 in exchange for the total consideration of approximately $4.3 billion. A summary of the fair value of the assets and liabilities acquired on April 1, 2014 was as follows (includes the 14 properties acquired on March 31, 2014 as the OP units issued were retired on April 1, 2014) (in millions):

Cash assumed
$
140

Rental properties and real estate under development
5,605

Real estate held for sale, net
108

Co-investments
224

Acquired in-place lease value
77

Other assets
16

Mortgage notes payable and unsecured debt
(1,747
)
Other liabilities
(87
)
Redeemable noncontrolling interest
(5
)
 
$
4,331

 
 

Cash consideration for BRE merger
$
556

Equity consideration for BRE merger
3,775

Total consideration for BRE merger
$
4,331


During the quarter ended March 31, 2015, the Company recorded adjustments to decrease the preliminary fair value of real property by $13.1 million, to increase the preliminary fair value of co-investments by $6.0 million and to decrease its preliminary estimate for liabilities assumed by $7.1 million. The changes in estimates were the result of subsequent additional information pertaining to the opening balance sheet identified by management. The Company believes that the information gathered to date provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed.
(2)  Significant Transactions During the Second Quarter of 2015 and Subsequent Events

Significant Transactions

Acquisitions

In April 2015, the Company purchased an additional 49.5% interest in Reveal, a 438 apartment community located in Woodland Hills, CA, from Wesco I, a related party in which the Company holds a 50.0% noncontrolling interest, for a contract price of $73.0 million. As a result of the acquisition, the property is now consolidated and the Company recorded a gain of $12.7 million to remeasure the portion of its investment in Wesco I related to Reveal at fair value. The gain is included in “Gain on remeasurement of co-investment” on the Company’s Condensed Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2015.
 
In June 2015, the Company purchased Avant, a 247 apartment community, located in downtown Los Angeles, California, for $99.0 million.

In June 2015, the Company made a $10.0 million preferred equity investment in a related party limited liability company that owns Greentree Apartments, a 220 apartment community located in San Jose, CA. This investment will earn a 9.5% preferred return and is scheduled to mature in June 2022. (See Note 5 - "Related Party Transactions" for further discussion.)

In June 2015, the Company made a $5.0 million preferred equity investment in a related party limited liability company that owns Sterling Cove Apartments, a 218 apartment community located in Concord, CA. This investment will earn a 9.5% preferred return and is scheduled to mature in June 2022. (See Note 5 - "Related Party Transactions" for further discussion.)




16

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2015 and 2014
(Unaudited)

Common Stock

During the second quarter, the Company issued 396,840 shares of common stock, through our equity distribution program, at an average price of $223.59 for net proceeds of $88.5 million.

During the third quarter through August 3, 2015, the Company did not sell any shares of common stock through its equity distribution program or through other means.

Subsequent Events

There were no material subsequent events.

(3) Co-investments

The Company has co-investments, which are accounted for under the equity method.  The co-investments own, operate and develop apartment communities.  The following table details the carrying value of Company's co-investments (in thousands):
 
June 30, 2015
 
December 31, 2014
Membership interest/Partnership interest in:
 
 
 
Wesco I and III
$
156,024

 
$
188,853

Fund II
228

 
696

Expo
6,825

 
7,352

The Huxley
—

 
11,471

CPPIB
339,600

 
336,977

Wesco IV
65,720

 
67,937

BEXAEW
92,260

 
97,686

Palm Valley
69,494

 
70,186

Total operating co-investments
730,151

 
781,158

Total development co-investments
194,442

 
152,574

Total preferred interest co-investments
119,615

 
108,691

Total co-investments
$
1,044,208

 
$
1,042,423

 
The combined summarized financial information of co-investments are as follows (in thousands).
 
June 30, 2015
 
December 31, 2014
Combined balance sheets: (1)
 
 
 
Rental properties and real estate under development
$
3,275,960

 
$
3,426,574

Other assets
110,690

 
107,902

Total assets
$
3,386,650

 
$
3,534,476

Debt
$
1,391,474

 
$
1,568,398

Other liabilities
95,386

 
91,579

Equity (1)
1,899,790

 
1,874,499

Total liabilities and equity
$
3,386,650

 
$
3,534,476

Company's share of equity
$
1,044,208

 
$
1,042,423



17

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2015 and 2014
(Unaudited)

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Combined statements of income: (1)
 
 
 
 
 
 
 
Property revenues
$
62,092

 
$
48,784

 
$
125,589

 
$
76,744

Property operating expenses
(23,184
)
 
(18,556
)
 
(46,138
)
 
(30,116
)
Net operating income
38,908

 
30,228

 
79,451

 
46,628

Gain on sale of real estate
—

 
—

 
14

 
11,369

Interest expense
(11,097
)
 
(9,422
)
 
(22,413
)
 
(15,445
)
General and administrative
(1,473
)
 
(1,811
)
 
(3,079
)
 
(3,199
)
Equity income from co-investments (2)
—

 
4,784

 
—

 
9,543

Depreciation and amortization
(24,265
)
 
(17,885
)
 
(49,646
)
 
(28,578
)
Net income
$
2,073

 
$
5,894

 
$
4,327

 
$
20,318

Company's share of net income (3)
$
4,472

 
$
5,629

 
$
8,783

 
$
16,155

 
(1) Includes preferred equity investments held by the Company.
(2) Represents income from Wesco II's preferred equity investment in Park Merced.
(3) Includes the Company's share of equity income from co-investments and preferred equity investments, gain on sales of co-investments, co-investment promote income and income from early redemption of preferred equity investments.

(4) Notes and Other Receivables
 
Notes receivable secured by real estate and other receivables consist of the following as of June 30, 2015 and December 31, 2014 (in thousands):
 
June 30, 2015
 
December 31, 2014
Notes receivable, secured, bearing interest at 6.0%, due December 2016
$
3,219

 
$
3,212

Notes and other receivables from affiliates
4,109

 
8,105

Other receivables
18,348

 
13,606

 
$
25,676

 
$
24,923


(5) Related Party Transactions

The Company charges certain fees to its co-investments for asset management, property management, development and redevelopment services. These fees from affiliates totaled $3.6 million and $5.0 million during the three months ended June 30, 2015 and 2014, respectively and $9.3 million and $7.6 million during the six months ended June 30, 2015 and 2014, respectively. All of these fees are net of intercompany amounts eliminated by the Company. The Company netted development and redevelopment fees of $1.5 million and $2.2 million against general and administrative expenses for the three months ended June 30, 2015 and 2014, respectively and $4.6 million and $3.1 million for the six months ended June 30, 2015 and 2014, respectively.

The Company’s Chairman and founder, Mr. George Marcus, is the Chairman of the Marcus & Millichap Company (“MMC”), which is a parent company of a diversified group of real estate service, investment, and development firms. Mr. Marcus is also the Co-Chairman of Marcus & Millichap, Inc. (“MMI”), and Mr. Marcus owns a controlling interest in MMI, a national brokerage firm listed on the NYSE. 

During the first quarter, a multifamily property, located in Anaheim, CA that was owned by an entity affiliated with MMC, in which the Company held a preferred equity investment, was sold. That investment of $13.7 million plus an additional $1.3 million in cash was invested as outlined in the next two paragraphs. The $13.7 million preferred equity investment earned a 9.0% preferred return and was scheduled to mature in September 2020.


18

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2015 and 2014
(Unaudited)

In June 2015, the Company made a $10.0 million preferred equity investment in an entity affiliated with MMC that owns Greentree Apartments, a 220 apartment community located in San Jose, CA. This investment will earn a 9.5% preferred return and is scheduled to mature in June 2022. Independent members of the Company’s Board of Directors that serve on the Nominating and Corporate Governance and Audit Committees approved the investment in this entity.

In June 2015, the Company made a $5.0 million preferred equity investment in a related party limited liability company that owns Sterling Cove Apartments, a 218 apartment community located in Concord, CA. This investment will earn a 9.5% preferred return and is scheduled to mature in June 2022. Independent members of the Company’s Board of Directors that serve on the Nominating and Corporate Governance and Audit Committees approved the investment in this entity.

In July 2014, the Company acquired Paragon Apartments, a 301 apartment community located in Fremont, CA for $111.0 million from an entity that was partially owned by an affiliate of MMC.  Independent members of the Company’s Board of Directors that serve on the Nominating and Corporate Governance and Audit Committees approved the acquisition of Paragon Apartments.

The Company has provided short-term bridge loans to affiliates.  As of June 30, 2015 and December 31, 2014, $4.1 million and $8.1 million of short-term loans remained outstanding due from joint venture affiliates.

(6) Debt
 
The Company does not have indebtedness as debt is incurred by the Operating Partnership.  The Company guarantees the Operating Partnership’s unsecured debt including the revolving credit facilities for the full term of such debt.

Debt consists of the following (in thousands):
 
June 30, 2015
 
December 31, 2014
 
Weighted Average
Maturity
In Years
Bonds private placement - fixed rate
$
463,667

 
$
463,443

 
3.7
Term loan - variable rate
224,299

 
224,130

 
1.4
Unsecured Bonds - fixed rate
2,405,140

 
1,915,975

 
7.3
Unsecured debt, net (1)
3,093,106

 
2,603,548

 
 
Lines of credit, net (2)
28,762

 
242,824

 

Mortgage notes payable, net (3)
$
2,247,463

 
$
2,234,317

 
6.5
Total debt
$
5,369,331

 
$
5,080,689

 
 
Weighted average interest rate on fixed rate unsecured and private placement bonds
3.6
%
 
3.6
%
 
 
Weighted average interest rate on variable rate term loan
2.4
%
 
2.4
%
 
 
Weighted average interest rate on lines of credit
1.9
%
 
1.8
%
 
 
Weighted average interest rate on mortgage notes payable
4.4
%
 
4.6
%
 
 

(1) Includes unamortized premium of $20.2 million and $27.5 million and reduced by unamortized debt issuance costs of $17.1 million and $13.9 million, as of June 30, 2015 and December 31, 2014, respectively.
(2) Reduced by unamortized debt issuance costs of $3.9 million and $3.6 million, as of June 30, 2015 and December 31, 2014, respectively.
(3) Includes unamortized premium of $73.8 million and $83.8 million and reduced by unamortized debt issuance costs of $11.1 million and $11.9 million, as of June 30, 2015 and December 31, 2014, respectively.






19

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2015 and 2014
(Unaudited)

The aggregate scheduled principal payments of the Company’s outstanding debt as of June 30, 2015 are as follows (excluding lines of credit):
Remaining in 2015
$
14,389

2016
391,519

2017
564,178

2018
320,621

2019
641,393

Thereafter
3,342,728

 
$
5,274,828


(7) Segment Information

The Company defines its reportable operating segments as the three geographical regions in which its communities are located: Southern California, Northern California and Seattle Metro.  Excluded from segment revenues and net operating income are management and other fees from affiliates, and interest and other income.  Non-segment revenues and net operating income included in the following schedule also consist of revenue generated from commercial properties.  Other non-segment assets include real estate under development, co-investments, cash and cash equivalents, marketable securities, notes and other receivables, prepaid expenses and other assets and deferred charges.

The revenues and net operating income for each of the reportable operating segments are summarized as follows for the three and six months ended June 30, 2015 and 2014 ($ in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015